Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarterly period ended June 30, 2010 (Form 10-Q)
Trustee: Compass Bank
Outstanding Units: 46,608,796 as of August 6, 2010
The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The working interest owner and operator is Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips. The Trust is a passive entity; it does not operate properties or engage in business activities other than collecting net proceeds and distributing them to Unit Holders.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Royalty Income | $22,450,139 | $2,474,109 | $44,452,655 | $12,024,685 |
| Total Revenue | $22,454,915 | $2,474,915 | $44,665,744 | $12,028,096 |
| Distributable Income | $21,680,581 | $1,788,227 | $43,209,899 | $10,757,663 |
| Distributable Income per Unit | $0.465161 | $0.038367 | $0.927076 | $0.230807 |
| Cash and Short-term Investments | $5,534,717 | N/A | $5,534,717 | N/A |
| Net Overriding Royalty Interest (Asset) | $15,801,981 | N/A | $15,801,981 | N/A |
| Distributions Payable | $5,378,928 | N/A | $5,378,928 | N/A |
Note: The Trust has no long-term debt. Cash reserves remain at $155,789.
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased approximately 807% for the quarter and 270% for the six-month period compared to 2009. This was driven primarily by higher commodity prices and reduced capital expenditures.
- Commodity Prices: Average natural gas prices rose from $2.82/Mcf in Q2 2009 to $5.12/Mcf in Q2 2010. Average oil prices increased from $36.58/Bbl to $71.54/Bbl over the same periods.
- Capital Expenditures: Capital costs deducted by BROG dropped significantly from ~$11 million in Q2 2009 to ~$2.2 million in Q2 2010. For the six months ended June 30, 2010, capital expenditures were $5.7 million compared to $20.9 million in 2009.
- Legal Settlement: The Trust received a $2.6 million settlement payment in May 2010 related to litigation with BROG, which contributed to the increase in distributable income.
- Production Volumes: Gas sales volumes decreased slightly (from 8.51 million Mcf in Q2 2009 to 7.71 million Mcf in Q2 2010), but higher prices more than offset the volume decline.
Outlook, Risks, and Management Commentary
- Capital Budget: BROG estimates a 2010 capital budget of $17.9 million for the Underlying Properties, with an additional $6.8 million for prior year budgets. Actual expenditures could range from $10 million to $45 million depending on regulatory approvals and gas prices.
- Contractual Obligations: Several gas sales contracts with Chevron, BP, and Macquarie Cook are set to terminate on March 31, 2011. Requests for proposals for new contracts are expected to be circulated. Contracts with PG&E and NMGC have been automatically extended through March 31, 2012.
- Regulatory Risks: New air quality rules and requirements for closed-loop drilling fluid systems may increase compliance costs and reduce the number of drilling projects.
- Dispute Resolution: BROG and the Trust settled ongoing litigation regarding an arbitration award. BROG paid $2.6 million and released claims for attorney fees. Both parties dismissed pending suits in New Mexico and Texas.
- Market Risk: The Trust is highly sensitive to natural gas prices. It holds no derivative instruments and has no foreign currency exposure.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current natural gas and oil prices against the Trust's historical performance, as revenue is directly correlated to these market rates.
- Capital Expenditure Impact: Monitor BROG's actual capital spending versus the $10M-$45M estimated range, as higher spending directly reduces distributable income.
- Contract Renewals: Track the status of gas sales contracts expiring in March 2011 to ensure favorable pricing terms are secured for 2012.
- Regulatory Compliance: Assess the potential financial impact of new New Mexico environmental regulations on drilling activity and operating costs.
- Legal Contingencies: Confirm that the $2.6 million settlement was fully received and that no further claims remain from the Wright v. AGIP Petroleum case or the arbitration dispute.